Certified Government Financial Manager (CGFM) Practice Exam 2025 - Free CGFM Practice Questions and Study Guide

The current ratio is a key financial metric that measures an entity's ability to meet its short-term obligations with its short-term assets. It is calculated by dividing current assets by current liabilities. A higher current ratio indicates that the entity has a greater ability to cover its short-term liabilities, suggesting a stronger liquidity position. This is particularly important for creditors and investors as it reflects the company's capability to manage its immediate financial obligations, ensuring they can operate without liquidity issues.

While the other options touch on various aspects of financial health, they do not specifically relate to what the current ratio indicates. For instance, the ability to pay long-term liabilities pertains more to measures like the debt-to-equity ratio, overall profitability is assessed through metrics such as net profit margin, and the debt-to-asset ratio provides insight into the proportion of an entity's assets that are financed through debt rather than the entity's capacity to meet short-term financial demands. Thus, the correct interpretation of the current ratio directly correlates with the entity’s capability to meet its short-term obligations.